the yield to maturity on corporate
bonds for various indices of energy companies from 2014 to 2016. Yield to ma-turities have decreased substantially
from 2015 to 2016, particularly for the
B-rated bonds which included a significant number of the E&P companies
in the study.

Lower risking for all non-producing
reserves compared to 2015

The median risking for proved developed non-producing (PDNP) reserves
was 80% in 2016 compared to a median
risking for PDNPs of 95% in 2015. The
median risking for proved undeveloped
(PUD) reserves was 75% in 2016 compared to a median risking for PUDs of

90% in 2015. Figure 8 shows the change
in risking from 2015 to 2016 for all reserve categories. These changes likely
reflect a heightened sense of caution
among clients due to the low-price
environment. Figure 9 shows the average projected strip price for the month of December for 2014
through 2016. Companies, particularly smaller ones, may not
have capital resources to explore and produce all reserves.

However, the definition of proved reserves, as set forth by
the SEC in Rule 4-10 of Regulation S-X, implies that the average
risking of the overall proved reserve category should not be
less than 90%. Therefore, this risking trend is important to
monitor going forward.

Approximately 20% of E&P valuations included corporate G&A
In 2015, 57% of companies included corporate G&A expenses
in their income approach, but in 2016, only 17% included it.
This reflects several ongoing trends in the industry. First, for
many acquirers, the expectation is that the additional assets
would be handled with current G&A and would not contribute
to additional G&A expenses. Second, due to the low-price
environment that many small- and mid-cap E&P companies
operate in, companies have focused on cutting costs and
prioritized cash conservation.

However, no company can operate indefinitely without any
corporate G&A. Therefore, this G&A trend is important to
monitor going forward, and we would expect to see more
companies include G&A going forward.

KEY CONSIDERATIONS SURROUNDING THE INDUSTRY

Key ongoing considerations which will have an impact on E&P
valuations include the impact of OPEC’s actions, the impact
of additional volumes contributed by Iran, and whether demand will increase enough to absorb current levels of production and have a meaningful impact on current storage

“Under the current market environment, E&P companies can expect
greater scrutiny to be applied to valuation analyses and their inputs
and assumptions. It is imperative that E&P companies continue to
use key assumptions which are both auditable and based on market
support.”